
[Federal Register Volume 82, Number 79 (Wednesday, April 26, 2017)]
[Notices]
[Pages 19282-19289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08390]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80496; File No. SR-NYSEArca-2017-42]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.87

April 20, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 17, 2017, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.87 (Nullification and 
Adjustment of Options Transactions including Obvious Errors). The 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

[[Page 19283]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to amend Rule 6.87 relating to the 
adjustment and nullification of erroneous transactions. This filing is 
based on a proposal recently submitted by Chicago Board Options 
Exchange, Incorporated (``CBOE'') and approved by the Commission.\4\
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    \4\ See Securities Exchange Act Release Nos. 80040 (February 14, 
2017), 82 FR 11248 (February 21, 2017) (``CBOE Approval Order''); 
79697 (December 27, 2016), 82 FR 167 (January 3, 2017) (``CBOE 
Notice'') (SR-CBOE-2016-088). See also Securities Exchange Act 
Release No. 80247 (March 15, 2017), 82 FR 14589 (March 21, 2017) 
(SR-BOX-2017-08) (immediately effective filing based on CBOE 
Approval Order).
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Background
    Last year, the Exchange and other options exchanges adopted a new, 
harmonized rule related to the adjustment and nullification of 
erroneous options transactions, including a specific provision related 
to coordination in connection with large-scale events involving 
erroneous options transactions.\5\ The Exchange believes that the 
changes the options exchanges implemented with the new, harmonized rule 
have led to increased transparency and finality with respect to the 
adjustment and nullification of erroneous options transactions. 
However, as part of the initial initiative, the Exchange and other 
options exchanges deferred a few specific matters for further 
discussion, including how erroneous Complex Orders and Stock/Option 
Orders should be handled.\6\
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    \5\ See Securities Exchange Act Release No. 74921 (May 8, 2015), 
80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41).
    \6\ Rule 6.62(e) (defining Complex Order) and (h)(1) (defining 
Stock/Option Order).
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    Specifically, the options exchanges have been working together to 
identify ways to improve the process related to the adjustment and 
nullification of erroneous options transactions as it relates to 
Complex Orders and Stock/Option Orders. The goal of the process that 
the options exchanges have undertaken is to further harmonize rules 
related to the adjustment and nullification of erroneous options 
transactions. As described below, the Exchange believes that the 
changes the options exchanges and NYSE Arca have agreed to propose will 
provide transparency and finality with respect to the adjustment and 
nullification of erroneous Complex Order and Stock/Option Order 
transactions. Particularly, the proposed changes seek to achieve 
consistent results for participants across U.S. options exchanges while 
maintaining a fair and orderly market, protecting investors and 
protecting the public interest.
    The proposed rule is the culmination of this coordinated effort and 
reflects discussions by the options exchanges whereby the exchanges 
that offer Complex Orders and/or Stock/Option Orders will universally 
adopt new provisions that the options exchanges collectively believe 
will improve the handling of erroneous options transactions that result 
from the execution of Complex Orders and Stock-Option orders.\7\
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    \7\ The Exchange notes that it only offers Stock/Option Orders 
in open outcry, but does not offer electronic Stock/Option Orders. 
Therefore, the Exchange is not adopting the CBOE provisions around 
Stock/Option Orders.
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    The Exchange believes that the proposed rule supports an approach 
consistent with long-standing principles in the options industry under 
which the general policy is to adjust rather than nullify transactions. 
The Exchange acknowledges that adjustment of transactions is contrary 
to the operation of analogous rules applicable to the equities markets, 
where erroneous transactions are typically nullified rather than 
adjusted and where there is no distinction between the types of market 
participants involved in a transaction. For the reasons set forth 
below, the Exchange believes that the distinctions in market structure 
between equities and options markets continue to support these 
distinctions between the rules for handling obvious errors in the 
equities and options markets.
    Various general structural differences between the options and 
equities markets point toward the need for a different balancing of 
risks for options market participants and are reflected in this 
proposal. Option pricing is formulaic and is tied to the price of the 
underlying stock, the volatility of the underlying security and other 
factors. Because options market participants can generally create new 
open interest in response to trading demand, as new open interest is 
created, correlated trades in the underlying or related series are 
generally also executed to hedge a market participant's risk. This 
pairing of open interest with hedging interest differentiates the 
options market specifically (and the derivatives markets broadly) from 
the cash equities markets. In turn, the Exchange believes that the 
hedging transactions engaged in by market participants necessitates 
protection of transactions through adjustments rather than 
nullifications when possible and otherwise appropriate.
    The options markets are also quote driven markets dependent on 
liquidity providers to an even greater extent than equities markets. In 
contrast to the approximately 7,000 different securities traded in the 
U.S. equities markets each day, there are more than 500,000 unique, 
regularly quoted option series. Given this breadth in options series 
the options markets are more dependent on liquidity providers than 
equities markets; such liquidity is provided most commonly by 
registered market makers but also by other professional traders. With 
the number of instruments in which registered market makers must quote 
and the risk attendant with quoting so many products simultaneously, 
the Exchange believes that those liquidity providers should be afforded 
a greater level of protection. In particular, the Exchange believes 
that liquidity providers should be allowed protection of their trades 
given the fact that they typically engage in hedging activity to 
protect them from significant financial risk to encourage continued 
liquidity provision and maintenance of the quote-driven options 
markets.
    In addition to the factors described above, there are other 
fundamental differences between options and equities markets which lend 
themselves to different treatment of different classes of participants 
that are reflected in this proposal. For example, there is no trade 
reporting facility in the options markets. Thus, all transactions must 
occur on an options exchange. This leads to significantly greater 
retail customer participation directly on exchanges than in the 
equities markets, where a significant amount of retail customer 
participation never reaches the Exchange but is instead executed in 
off-exchange venues such as alternative trading systems, broker-dealer 
market making desks and internalizers. In turn, because of such direct 
retail customer participation, the exchanges have taken steps to afford 
those retail customers--generally Customers--more favorable treatment 
in some circumstances.
Proposed Rule
    As more fully described below, although the proposed rule applies 
much of the current rule (i.e., initial harmonized rule) to Complex 
Orders, it deviates to account for unique qualities of these 
transactions.\8\ Specifically, the

[[Page 19284]]

proposed rule reflects the fact that Complex Orders can execute against 
other Complex Orders or can execute against individual simple orders in 
the leg market.\9\ When a Complex Order executes against the leg 
markets, there may be different counterparties on each leg of the 
Complex Order, and not every leg will necessarily be executed at an 
erroneous price. To account for these variables, the proposed rule, as 
set forth in new Commentary .05, is divided into two parts--paragraphs 
(a) and (b).
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    \8\ For example, for a Complex Order to qualify as an Obvious or 
Catastrophic Error, at least one leg of the Complex Order must 
itself qualify as an Obvious or Catastrophic Error under the current 
rule. See proposed Commentary .05(a)-(b) to Rule 6.87. See also Rule 
6.87(c)(5) (regarding Complex Order Obvious Errors, which rule text 
was not part of the prior harmonization effort).
    \9\ The leg market consists of individual quotes and/or orders 
in single options series. A Complex Order may be received by the 
Exchange electronically, and the legs of the Complex Order may have 
different counterparties. For example, Market Maker 1 may be quoting 
in ABC calls and Market Maker 2 may be quoting in ABC puts. A 
Complex Order to buy the ABC calls and puts may execute against the 
quotes of Market Maker 1 and Market Maker 2.
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Complex Orders Executed Against Individual Legs
    Proposed Commentary .05(a) governs the review of Complex Orders 
that are executed against the individual legs (as opposed to against 
another Complex Order). Proposed Rule 6.87.05(a) provides:

    If a Complex Order executes against individual legs and at least 
one of the legs qualifies as an Obvious Error under paragraph (c)(1) 
or a Catastrophic Error under paragraph (d)(1), then the leg(s) that 
is an Obvious or Catastrophic Error will be adjusted in accordance 
with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of 
whether one of the parties is a Customer. However, any Customer 
order subject to this paragraph (a) will be nullified if the 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the Complex Order or individual leg(s). If any leg of 
a Complex Order is nullified, the entire transaction is nullified.

    As previously noted, at least one of the legs of the Complex Order 
must qualify as an Obvious or Catastrophic Error under the current rule 
in order for the Complex Order to receive Obvious or Catastrophic Error 
relief. Thus, when the Exchange is notified (within the timeframes set 
forth in paragraph (c)(2) or (d)(2)) of a Complex Order that is a 
possible Obvious Error or Catastrophic Error, the Exchange will first 
review the individual legs of the Complex Order to determine if one or 
more legs qualify as an Obvious or Catastrophic Error.\10\ If no leg 
qualifies as an Obvious or Catastrophic Error, the transaction stands--
no adjustment and no nullification.
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    \10\ Because a Complex Order can execute against the leg market, 
the Exchange may also be notified of a possible Obvious or 
Catastrophic Error by a counterparty that received an execution in 
an individual options series. If upon review of a potential Obvious 
Error the Exchange determines an individual options series was 
executed against the leg of a Complex Order, proposed Commentary .05 
of Rule 6.87 will govern.
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    Reviewing the legs to determine whether one or more legs qualify as 
an Obvious or Catastrophic Error requires the Exchange to follow the 
current rule. In accordance with paragraphs (c)(1) and (d)(1) of the 
current rule, the Exchange compares the execution price of each 
individual leg to the Theoretical Price \11\ of each leg (as determined 
by paragraph (b) of the current rule). If the execution price of an 
individual leg is higher or lower than the Theoretical Price for the 
series by an amount equal to at least the amount shown in the Obvious 
Error table in paragraph (c)(1) of the current rule or the Catastrophic 
Error table in paragraph (d)(1) of the initial harmonized rule, the 
individual leg qualifies as an Obvious or Catastrophic error, and the 
Exchange will take steps to adjust or nullify the transaction.\12\
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    \11\ See Rule 6.87(b) (defining the manner in which Theoretical 
Price is determined).
    \12\ Only the execution price on the leg (or legs) that 
qualifies as an Obvious or Catastrophic Error per proposed Rule 
6.87.05 will be adjusted. The execution price of a leg (or legs) 
that does not qualify as an obvious or catastrophic error will not 
be adjusted.
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    To illustrate, assume that a Customer enters a Complex Order to the 
Exchange consisting of leg 1 and leg 2: Leg 1 is to buy 100 ABC calls; 
and Leg 2 is to sell 100 ABC puts. Also, assume that Market Maker 1 
(``MM1'') is quoting the ABC calls at $1.00-1.20; and Market Maker 2 
(``MM2'') is quoting the ABC puts at $2.00-2.20. If the Complex Order 
executes against the quotes of MMs 1 and 2, the Customer buys the ABC 
calls for $1.20 and sells the ABC puts for $2.00. As with the Obvious/
Catastrophic Error reviews for simple orders, the execution price of 
each Leg (i.e., Legs 1 and 2) are compared to the Theoretical Price for 
each Leg to determine if either Leg qualifies as an Obvious Error (per 
paragraph (c)(1)) or Catastrophic Error (per paragraph (d)(1)).\13\ If 
it is determined that one or both of the legs are an Obvious or 
Catastrophic Error, then the leg (or legs) that is an Obvious or 
Catastrophic Error will be adjusted in accordance with paragraphs 
(c)(4)(A) or (d)(3) of the current rule, regardless of whether one of 
the parties is a Customer.\14\
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    \13\ See supra note 11.
    \14\ See Rule 6.87 (a)(1) (defining Customer for purposes of 
Rule 6.87 as not including any broker-dealer or Professional 
Customer).
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    Although a single-legged execution that is deemed to be an Obvious 
Error under the current rule is nullified whenever a Customer is 
involved in the transaction, the Exchange believes adjusting execution 
prices is generally better for the marketplace than nullifying 
executions because liquidity providers often execute hedging 
transactions to offset options positions. When an options transaction 
is nullified the hedging position can adversely affect the liquidity 
provider. With regards to Complex Orders that execute against 
individual legs, the additional rationale for adjusting erroneous 
execution prices when possible is the fact that the counterparty on a 
leg that is not executed at an Obvious or Catastrophic Error price 
cannot look at the execution price to determine whether the execution 
may later be nullified (as opposed to the counterparty on single-legged 
order that is executed at an Obvious Error or Catastrophic Error 
price).
    Paragraph (c)(4)(A) of the current rule mandates that if it is 
determined that an Obvious Error has occurred, the execution price of 
the transaction will be adjusted pursuant to the table set forth in 
(c)(4)(A). Although for simple orders, paragraph (c)(4)(A) is only 
applicable when no party to the transaction is a Customer; for purposes 
of Complex Orders, proposed Commentary .05(a) will supersede this 
limitation. Specifically, if it is determined that a leg (or legs) of a 
Complex Order is an Obvious Error, the leg (or legs) will be adjusted 
pursuant to paragraph (c)(4)(A), regardless of whether any party to the 
transaction is a Customer. The Size Adjustment Modifier (defined in 
subparagraph (a)(4)) will similarly apply (regardless of whether a 
Customer is on the transaction) by virtue of the application of 
paragraph (c)(4)(A).\15\ The Exchange notes that adjusting all market 
participants is not unique or novel. When the Exchange determines that 
a simple order execution is a Catastrophic Error pursuant to the 
initial harmonized rule, paragraph (d)(3) already provides for 
adjusting the execution price for all market participants, including 
Customers.
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    \15\ See Rule 6.87(c)(4)(A) (providing that any non-Customer 
Obvious Error exceeding 50 contracts will be subject to the Size 
Adjustment Modifier defined in sub-paragraph (a)(4)).
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    Furthermore, as with the current, Proposed Rule 6.87.05(a) provides

[[Page 19285]]

protection for Customer orders, stating that where at least one party 
to a Complex Order transaction is a Customer, the transaction will be 
nullified if adjustment would result in an execution price higher (for 
buy transactions) or lower (for sell transactions) than the Customer's 
limit price on the Complex Order or individual leg(s). For example, 
assume a Customer enters a Complex Order to buy leg 1 and leg 2:
     Assume the NBBO for leg 1 is $0.20-1.00 and the NBBO for 
leg 2 is $0.501.00 and that these have been the NBBOs since the market 
opened.
     A split-second prior to the execution of the Complex 
Order, a different Customer enters a simple order to sell the leg 1 
options series at $1.30, and this order enters the Exchange's book 
resulting in a BBO of $0.20-$1.30. The limit price of the simple order 
is $1.30.
     The Complex Order executes leg 1 against the Exchange best 
offer of $1.30 and leg 2 executes at $1.00, for a net execution price 
of $2.30.
     However, leg 1 executed on a wide quote (the NBBO for leg 
1 was $0.20-1.00 at the time of execution, which is wider than 
$0.75).\16\ Leg 2 was not executed on a wide quote (the market for leg 
2 was $0.50-1.00); thus, leg 2 execution price stands.
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    \16\ See Rule 6.87(b)(3).
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     The Exchange determines that the Theoretical Price for leg 
1 is $1.00, which was the best offer prior to the execution. Leg 1 
qualifies as an Obvious Error because the difference between the 
Theoretical Price ($1.00) and the execution price ($1.30) is larger 
than $0.25.\17\
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    \17\ See Rule 6.87(c)(1).
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     Per Proposed Rule 6.87.05(a), Customers will also be 
adjusted in accordance with Rule 6.87(c)(4)(A), which for a buy 
transaction under $3.00 means the Theoretical Price will be adjusted by 
adding $0.15 to the Theoretical Price of $1.00.\18\ Thus, the adjusted 
execution price for Leg 1 would be $1.15.
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    \18\ See Rule 6.87(c)(4)(A).
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     However, adjusting the execution price of leg 1 to $1.15 
would violate the limit price of the Customer's sell order for leg 1, 
which was $1.30.
     Thus, the entire Complex Order transaction will be 
nullified because the limit price of a Customer's sell order would be 
violated by the adjustment.\19\
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    \19\ If any leg of a Complex Order is nullified, the entire 
transaction is nullified. See Proposed Rule 6.87.05(a). The Exchange 
notes that the simple order in this example is not an erroneous sell 
transaction because the execution price was not erroneously low. See 
Rule 6.87(a)(2).
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    As the above example demonstrates, incoming Complex Orders may 
execute against resting simple orders in the leg market. If a Complex 
Order leg is deemed to be an Obvious Error, adjusting the execution 
price of the leg may violate the limit price of the resting order, 
which will result in nullification if the resting order is for a 
Customer. In contrast, Commentary .02 to Rule 6.87 provides that if an 
adjustment would result in an execution price that is higher than an 
erroneous buy transaction or lower than an erroneous sell transaction 
the execution will not be adjusted or nullified.\20\ If the adjustment 
of a Complex Order would violate the Complex Order Customer's limit 
price, the transaction will be nullified.
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    \20\ See Commentary .02 to Rule 6.87.
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    As previously noted, paragraph (d)(3) of the current rule already 
mandates that if it is determined that a Catastrophic Error has 
occurred, the execution price of the transaction will be adjusted 
pursuant to the table set forth in (d)(3). For purposes of Complex 
Orders, under Rule 6.87.05(a), if one of the legs of a Complex Order is 
determined to be a Catastrophic Error under paragraph (d)(3), all 
market participants will be adjusted in accordance with the table set 
forth in (d)(3). Again, however, where at least one party to a Complex 
Order transaction is a Customer, the transaction will be nullified if 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the Complex Order or individual leg(s). Again, if any 
leg of a Complex Order is nullified, the entire transaction is 
nullified.
    Other than honoring the limit prices established for Customer 
orders, the Exchange has proposed to treat Customers and non-Customers 
the same in the context of the Complex Orders that trade against the 
leg market. When Complex Orders trade against the leg market, it is 
possible that at least some of the legs will execute at prices that 
would not be deemed Obvious or Catastrophic Errors, which gives the 
counterparty in such situations no indication that the execution will 
later by adjusted or nullified. The Exchange believes that treating 
Customers and non-Customers the same in this context will provide 
additional certainty to non-Customers (especially Market Makers) with 
respect to their potential exposure and hedging activities, including 
comfort that even if a transaction is later adjusted, such transaction 
will not be fully nullified. However, as noted above, under the 
proposed rule where at least one party to the transaction is a 
Customer, the trade will be nullified if the adjustment would result in 
an execution price higher (for buy transactions) or lower (for sell 
transactions) than the Customer's limit price on the Complex Order or 
individual leg(s). The Exchange has retained the protection of a 
Customer's limit price in order to avoid a situation where the 
adjustment could be to a price that a Customer would not have expected, 
and market professionals such as non-Customers would be better prepared 
to recover in such situations. Therefore, adjustment for non-Customers 
is more appropriate.
Complex Orders Executed Against Complex Orders
    Proposed Commentary .05(b) to Rule 6.87 governs the review of 
Complex Orders that are executed against other Complex Orders. 
Specifically, proposed Rule 6.87.05(b) provides:

    If a Complex Order executes against another Complex Order and at 
least one of the legs qualifies as an Obvious Error under paragraph 
(c)(1) or a Catastrophic Error under paragraph (d)(1), then the 
leg(s) that is an Obvious or Catastrophic Error will be adjusted or 
busted in accordance with paragraph (c)(4) or (d)(3), respectively, 
so long as either: (i) The width of the Complex NBBO for the Complex 
Order strategy just prior to the erroneous transaction was equal to 
or greater than the amount set forth in the wide quote table of 
paragraph (b)(3); or (ii) the net execution price of the Complex 
Order is higher (lower) than the offer (bid) of the Complex NBBO for 
the Complex Order strategy just prior to the erroneous transaction 
by an amount equal to at least the amount shown in the table in 
paragraph (c)(1). If any leg of a Complex Order is nullified, the 
entire transaction is nullified.

    As described above in relation to proposed Rule 6.87.05(a), the 
first step is for the Exchange to review (upon receipt of a timely 
notification in accordance with paragraph (c)(2) or (d)(2) of the 
current rule) the individual legs to determine whether a leg or legs 
qualifies as an Obvious or Catastrophic Error. If no leg qualifies as 
an Obvious or Catastrophic Error, the transaction stands--no adjustment 
and no nullification. If the adjustment of a complex order would 
violate the complex order Customer's limit price, the transaction will 
be nullified.
    Unlike proposed Rule 6.87.05(a), the Exchange also proposes to 
compare the net execution price of the entire Complex Order package to 
the Complex NBBO for the complex order strategy.\21\

[[Page 19286]]

Complex Orders are exempt from the order protection rules of the 
options exchanges.\22\ Thus, depending on the manner in which the 
systems of an options exchange are calibrated, a Complex Order can 
execute without regard to the prices offered in the complex order books 
or the leg markets of other options exchanges. In certain situations, 
reviewing the execution prices of the legs in a vacuum would make the 
leg appear to be an Obvious or Catastrophic error, even though the net 
execution price on the Complex Order is not an erroneous price. For 
example, assume the Exchange receives a Complex Order to buy ABC calls 
and sell ABC puts.
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    \21\ The Complex NBBO is the derived net market for a Complex 
Order package. For example, if the NBBO of Leg 1 is $1.00-2.00 and 
the NBBO of Leg 2 is $5.00-7.00, then the Complex NBBO for a Complex 
Order to buy Leg 1 and buy Leg 2 is $6.00-9.00. See Rule 6.1A(11)(b) 
(defining Complex NBBO as ``the NBBO for a given complex order 
strategy as derived from the national best bid and national best 
offer for each individual component series of a Complex Order''). 
The Complex NBBO is analogous to the concept of the National Spread 
Market, or NSM, as used by other exchanges. See supra 4, CBOE 
Notice, 82 FR at 170; CBOE Approval Order, 82 FR at 11249-50.
    \22\ All options exchanges have the same order protection rule. 
See, e.g., Rule 6.94(b)(7).
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     If the BBO for the ABC calls is $5.50-7.50 and the BBO for 
ABC puts is $3.00-4.50, then the Exchange's spread market is $1.00-
4.50.\23\
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    \23\ The Complex Order is to buy ABC calls and sell ABC puts. 
The Exchange's best offer for ABC puts is $7.50 and Exchange's best 
bid for is $3.00. If the Customer were to buy the Complex Order 
strategy, the Customer would receive a debit of $4.50 (buy ABC calls 
for $7.50 minus selling ABC puts for $3.00). If the Customer were to 
sell the Complex Order strategy the Customer would receive a credit 
of $1.00 (selling the ABC calls for $5.50 minus buying the ABC puts 
for $4.50). Thus, the Exchange's spread market--or Complex BBO--is 
$1.00-4.50. See also Rule 6.1A((b) (defining Complex BBO as ``the 
BBO for a given complex order strategy as derived from the best bid 
on OX and best offer on OX for each individual component series of a 
Complex Order''). The Complex BBO is analogous to the concept of the 
``exchange spread market,'' as used by other exchanges. See supra 4, 
CBOE Notice, 82 FR at 173, fn22.
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     If the NBBO for the ABC calls is $6.00-6.50 and the NBBO 
for the ABC puts is $3.50-4.00, then the Complex NBBO is $2.00-3.00. If 
the Customer buys the calls at $7.50 and sells the puts at $4.50, the 
Complex Order Customer receives a net execution price of $3.00 (debit), 
which is the expected net execution price as indicated by the Complex 
NBBO offer of $3.00.
    If the Exchange were to solely focus on the $7.50 execution price 
of the ABC calls or the $4.50 execution price of the ABC puts, the 
execution would qualify as an Obvious or Catastrophic error because the 
execution price on the legs was outside the NBBO, even though the net 
execution price is accurate. Thus, the additional review of the Complex 
NBBO to determine if the Complex Order was executed at a truly 
erroneous price is necessary.\24\ The same concern is not present when 
a Complex Order executes against the leg market under proposed Rule 
6.87.05(a). The Exchange permits a given leg of a Complex Order to 
trade through the NBBO, however the Exchange will not accept incoming 
Complex Orders if they are priced a certain amount outside of the 
Complex NBBO.\25\
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    \24\ The Exchange notes that this treatment is consistent with 
current Rule 6.87(c)(5)(A), which provides that ``[i]f a Complex 
Order executes against another Complex Order in the Complex Order 
Book and one or more legs of the transaction is deemed eligible to 
be adjusted or busted, the entire trade (all legs) will be busted, 
unless both parties agree to adjust the transaction to a different 
price within thirty (30) minutes of being notified by the Exchange 
of the decision to bust''). The Exchange proposes to delete 
paragraph (c)(5) of the Rule in its entirety to harmonize with 
proposed Rule 6.87.05. See below, under the heading ``Conforming 
Change to Eliminate Current Rule Regarding Complex Orders Obvious 
Errors,'' for additional discussion.
    \25\ Commentary .05 to Rule 6.91 sets forth the Price Protection 
Filter (``Filter''), which prevents the execution of aggressively-
priced electronic Complex Orders (i.e., priced so far away from the 
prevailing contra-side NBBO market for the same strategy). 
Specifically, an incoming electronic Complex Order will be rejected 
(or cancelled) if the sum of the following is less than zero 
($0.00): (i) The net debit (credit) limit price of the order, (ii) 
the contra-side Complex NBBO for that same Complex Order, and (iii) 
an amount specified by the Exchange (``Specified Amount'' or 
``Amount''). The Specified Amount varies depending on the smallest 
MPV of any leg in the Complex Order, e.g., the Amount ranges from 
.10 to .15 to .30 where the smallest MPV of any leg is .01 to .05 to 
.10, respectively. See Commentary .05 to Rule 6.91.
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    In order to incorporate Complex NBBO, proposed Rule 6.87.05(b) 
provides that if the Exchange determines that a leg or legs does 
qualify as an Obvious or Catastrophic Error, the leg or legs will be 
adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the 
current rule, so long as either: (i) The width of the Complex NBBO for 
the Complex Order strategy just prior to the erroneous transaction was 
equal to or greater than the amount set forth in the wide quote table 
of paragraph (b)(3) of the current rule or (ii) the net execution price 
of the Complex Order is higher (lower) than the offer (bid) of the 
Complex NBBO for the Complex Order strategy just prior to the erroneous 
transaction by an amount equal to at least the amount shown in the 
table in paragraph (c)(1) of the current rule.
    For example, assume an individual leg or legs qualifies as an 
Obvious or Catastrophic Error and the width of the Complex NBBO of the 
Complex Order strategy just prior to the erroneous transaction is 
$6.00-9.00. The Complex Order will qualify to be adjusted or busted in 
accordance with paragraph (c)(4) of the current rule because the wide 
quote table of paragraph (b)(3) of the current rule indicates that the 
minimum amount is $1.50 for a bid price between $5.00 to $10.00. If the 
Complex NBBO were instead $6.00-7.00 the Complex Order strategy would 
not qualify to be adjusted or busted pursuant to proposed Rule 
6.87.05(b)(i) because the width of the Complex NBBO is $1.00, which is 
less than the required $1.50. However, the execution may still qualify 
to be adjusted or busted in accordance with paragraph (c)(4) or (d)(3) 
of the current rule pursuant to proposed Rule 6.87.05(b)(ii). Focusing 
on the Complex NBBO in this manner will ensure that the Obvious/
Catastrophic Error review process focuses on the net execution price 
instead of the execution prices of the individual legs, which may have 
execution prices outside of the NBBO of the leg markets.
    Again, assume an individual leg (or legs) qualifies as an Obvious 
or Catastrophic Error as described above. If the Complex NBBO is $6.00-
7.00 (not a wide quote pursuant to the wide quote table in paragraph 
(b)(3) of the current rule) but the execution price of the entire 
Complex Order package (i.e., the net execution price) is higher (lower) 
than the offer (bid) of the Complex NBBO for the complex order strategy 
just prior to the erroneous transaction by an amount equal to at least 
the amount in the table in paragraph (c)(1) of the current rule, then 
the Complex Order qualifies to be adjusted or busted in accordance with 
paragraph (c)(4) or (d)(3) of the current rule. For example, if the 
Complex NBBO for the Complex Order strategy just prior to the erroneous 
transaction is $6.00-7.00 and the net execution price of the Complex 
Order transaction is $7.75, the Complex Order qualifies to be adjusted 
or busted in accordance with paragraph (c)(4) of the current rule 
because the execution price of $7.75 is more than $0.50 (i.e., the 
minimum amount according to the table in paragraph (c)(1) when the 
price is above $5.00 but less than $10.01) from the Complex NBBO offer 
of $7.00. Focusing on the Complex NBBO in this manner will ensure that 
the Obvious/Catastrophic error review process focuses on the net 
execution price instead of the execution prices of the individual legs, 
which may have execution prices outside of the NBBO of the leg markets.

[[Page 19287]]

    Although the Exchange believes adjusting execution prices is 
generally better for the marketplace than nullifying executions because 
liquidity providers often execute hedging transactions to offset 
options positions, the Exchange recognizes that Complex Orders 
executing against other Complex Orders is similar to simple orders 
executing against other simple orders because both parties are able to 
review the execution price to determine whether the transaction may 
have been executed at an erroneous price. Thus, for purposes of Complex 
Orders that meet the requirements of Rule 6.87.05(b), the Exchange 
proposes to apply the current rule and adjust or bust obvious errors in 
accordance with paragraph (c)(4) (as opposed to applying paragraph 
(c)(4)(A) as is the case under Rule 6.87.05(a) and catastrophic errors 
in accordance with (d)(3).
    Therefore, for purposes of Complex Orders under proposed Rule 
6.87.05(b), if one of the legs is determined to be an obvious error 
under paragraph (c)(1), all Customer transactions will be nullified, 
unless an OTP Holder or OTP Firm submits 200 or more Customer 
transactions for review in accordance with (c)(4)(C).\26\ For purposes 
of Complex Orders under proposed Rule 6.87.05(b), if one of the legs is 
determined to be a Catastrophic Error under paragraph (d)(3) and all of 
the other requirements of proposed Rule 6.87.05(b) are met, all market 
participants will be adjusted in accordance with the table set forth in 
(d)(3). Again, however, pursuant to paragraph (d)(3) where at least one 
party to a Complex Order transaction is a Customer, the transaction 
will be nullified if adjustment would result in an execution price 
higher (for buy transactions) or lower (for sell transactions) than the 
Customer's limit price on the Complex Order or individual leg(s). Also, 
if any leg of a Complex Order is nullified, the entire transaction is 
nullified.
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    \26\ Rule 6.87(c)(4)(C) also requires the orders resulting in 
200 or more Customer transactions to have been submitted during the 
course of 2 minutes or less.
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Conforming Change To Eliminate Rule Regarding Complex Orders Obvious 
Errors
    Finally, the Exchange proposes to delete the rule text in paragraph 
(c)(5) of the current rule, which addresses ``Complex Order Obvious 
Errors,'' in light of the proposed addition of Commentary .05 to the 
Rule. The Exchange proposed to designate Rule 6.87(c)(5) as 
``Reserved.'' The Exchange believes this modification would add 
clarity, transparency and internal consistency to the Rule.
Implementation
    In order to ensure that the other options exchanges are able to 
adopt rules consistent with this proposal and to coordinate 
effectiveness of such harmonized rules, the Exchange proposed to delay 
the operative date of this proposal to April 17, 2017.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\27\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\28\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange and other options exchanges are 
seeking to adopt harmonized rules related to the adjustment and 
nullification of erroneous options transactions. The Exchange believes 
that the proposed rule will provide greater transparency and clarity 
with respect to the adjustment and nullification of erroneous options 
transactions. Particularly, the proposed changes seek to achieve 
consistent results for participants across U.S. options exchanges while 
maintaining a fair and orderly market, protecting investors and 
protecting the public interest. Based on the foregoing, the Exchange 
believes that the proposal is consistent with Section 6(b)(5) of the 
Act \29\ in that the proposed rule will foster cooperation and 
coordination with persons engaged in regulating and facilitating 
transactions.
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    \29\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the various provisions allowing or dictating 
adjustment rather than nullification of a trade are necessary given the 
benefits of adjusting a trade price rather than nullifying the trade 
completely. Because options trades are used to hedge, or are hedged by, 
transactions in other markets, including securities and futures, many 
Participants, and their customers, would rather adjust prices of 
executions rather than nullify the transactions and, thus, lose a hedge 
altogether. As such, the Exchange believes it is in the best interest 
of investors to allow for price adjustments as well as nullifications.
    The Exchange does not believe that the proposal is unfairly 
discriminatory, even though it differentiates in many places between 
Customers and non-Customers. As with the current rule, Customers are 
treated differently, often affording them preferential treatment. This 
treatment is appropriate in light of the fact that Customers are not 
necessarily immersed in the day-to-day trading of the markets, are less 
likely to be watching trading activity in a particular option 
throughout the day, and may have limited funds in their trading 
accounts. At the same time, the Exchange reiterates that in the U.S. 
options markets generally there is significant retail customer 
participation that occurs directly on (and only on) options exchanges 
such as the Exchange. Accordingly, differentiating among market 
participants with respect to the adjustment and nullification of 
erroneous options transactions is not unfairly discriminatory because 
it is reasonable and fair to provide Customers with additional 
protections as compared to non-Customers.
    The Exchange believes that its proposal to adopt the ability to 
adjust a Customer's execution price when a Complex Order is deemed to 
be an Obvious or Catastrophic Error is consistent with the Act. A 
Complex Order that executes against individual leg markets may receive 
an execution price on an individual leg that is not an Obvious or 
Catastrophic error but another leg of the transaction is an Obvious or 
Catastrophic Error. In such situations where the Complex Order is 
executing against at least one individual or firm that is not aware of 
the fact that they have executed against a Complex Order or that the 
Complex Order has been executed at an erroneous price, the Exchange 
believes it is more appropriate to adjust execution prices if possible 
because the derivative transactions are often hedged with other 
securities. Allowing adjustments instead of nullifying transactions in 
these limited situations will help to ensure that market participants 
are not left with a hedge that has no position to hedge against.
    Finally, the proposal to delete paragraph (c)(5) of the current 
rule, which addresses ``Complex Order Obvious Errors,'' would add would 
add clarity, transparency and internal consistency to the Rule, in 
light of the proposed addition of Commentary .05 to the Rule.

[[Page 19288]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. In this regard and as indicated above, the Exchange notes 
that the proposed rule change is substantially similar to a filing 
submitted by CBOE that was recently approved by the Commission.\30\
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    \30\ See CBOE Approval Order, supra note 4.
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    The Exchange believes the proposal will not impose a burden on 
intermarket competition but will rather alleviate any burden on 
competition because it is the result of a collaborative effort by all 
options exchanges to harmonize and improve the process related to the 
adjustment and nullification of erroneous options transactions. The 
Exchange does not believe that the rules applicable to such process is 
an area where options exchanges should compete, but rather, that all 
options exchanges should have consistent rules to the extent possible. 
Particularly where a market participant trades on several different 
exchanges and an erroneous trade may occur on multiple markets nearly 
simultaneously, the Exchange believes that a participant should have a 
consistent experience with respect to the nullification or adjustment 
of transactions. The Exchange understands that all other options 
exchanges that trade Complex Orders and/or Stock/Option Orders intend 
to file proposals that are substantially similar to this proposal.
    The Exchange does not believe that the proposed rule change imposes 
a burden on intramarket competition because the provisions apply to all 
market participants equally within each participant category (i.e., 
Customers and non-Customers). With respect to competition between 
Customer and non-Customer market participants, the Exchange believes 
that the proposed rule acknowledges competing concerns and tries to 
strike the appropriate balance between such concerns. For instance, the 
Exchange believes that protection of Customers is important due to 
their direct participation in the options markets as well as the fact 
that they are not, by definition, market professionals. At the same 
time, the Exchange believes due to the quote-driven nature of the 
options markets, the importance of liquidity provision in such markets 
and the risk that liquidity providers bear when quoting a large breadth 
of products that are derivative of underlying securities, that the 
protection of liquidity providers and the practice of adjusting 
transactions rather than nullifying them is of critical importance. As 
described above, the Exchange will apply specific and objective 
criteria to determine whether an erroneous transaction has occurred 
and, if so, how to adjust or nullify a transaction.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \31\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\32\
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    \31\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Commission has waived the five-day prefiling requirement in this 
case.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \33\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \34\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest as 
it will allow the Exchange to implement the proposed rule change by 
April 17, 2017 in coordination with the other options exchanges. 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposal operative upon filing.\35\
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    \33\ 17 CFR 240.19b-4(f)(6).
    \34\ 17 CFR 240.19b-4(f)(6)(iii).
    \35\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2017-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2017-42. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official

[[Page 19289]]

business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2017-42, and should be submitted on or before 
May 17, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08390 Filed 4-25-17; 8:45 am]
 BILLING CODE 8011-01-P


